Nassim Nicholas Taleb. The black swan
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EPISTEMOCRACY,
A
DREAM
199
tive (indeed), provided it remains a harmless narrative. One should learn
under
severe caution. History is certainly not a place to theorize or derive
general knowledge, nor is it meant to help in the future, without some cau-
tion. We can get negative confirmation from history, which is invaluable,
but we get plenty of illusions of knowledge along with it.
This
brings me back once again to Menodotus and the treatment of the
turkey problem and how to not be a sucker for the past. The empirical
doctor's approach to the problem of induction was to know history with-
out theorizing from it. Learn to read history, get all the knowledge you
can,
do not frown on the anecdote, but do not
draw
any causal links, do
not try to reverse engineer too much—but if you do, do not make big
sci-
entific
claims. Remember that the empirical skeptics had respect for cus-
tom: they used it as a default, a basis for action, but not for more
than
that. This clean approach to the past they called epilogism.*
But
most historians have another opinion. Consider the representative
introspection What Is History? by Edward Hallett Carr. You will catch
him explicitly
pursuing
causation as a central aspect of his job. You can
even go higher up: Herodotus, deemed to be the father of the subject, de-
fined
his
purpose
in the opening of his work:
To
preserve a memory of the deeds of the Greeks and
barbarians,
"and
in
particular,
beyond everything else, to give a
cause
[emphasis mine]
to their fighting one another."
You
see the same with all theoreticians of history, whether Ibn Khal-
doun,
Marx, or Hegel. The more we try to
turn
history into anything other
than
an enumeration of accounts to be enjoyed with minimal theorizing, the
more we get into trouble. Are we so plagued with the narrative
fallacy?!
*
Yogi
Berra
might have a theory of epilogism with his saying, "You can observe a
lot by just watching."
f
While looking at the past it would be a good idea to resist naïve analogies. Many
people have
compared
the United States today to Ancient Rome, both from a mili-
tary
standpoint (the destruction of
Carthage
was often invoked as an incentive for
the
destruction of enemy regimes) and from a social one (the endless platitudinous
warnings
of the upcoming decline and fall). Alas, we need to be extremely careful
in transposing knowledge from a simple environment
that
is closer to type 1, like
the
one we had in antiquity, to today's type 2, complex system, with its intricate
webs of casual links. Another
error
is to draw casual conclusions from the absence
of
nuclear war, since, invoking the Casanova argument of
Chapter
8,1 would re-
peat
that
we would not be here had a nuclear war taken place, and it is not a good
idea
for us to derive a "cause" when our survival is conditioned on
that
cause.
200
WE
JUST
CAN'T
PREDICT
We
may have to wait for a generation of skeptical-empiricist historians
capable
of
understanding
the difference between a forward process and a
reverse one.
Just
as Popper attacked the historicists in their making claims about
the future, I have just presented the weakness of the historical approach in
knowing the
past
itself.
After
this discussion about future (and past) blindness, let us see what to
do about it. Remarkably, there are extremely practical measures we can
take.
We will explore this next.
Chapter
Thirteen
APPELLES
THE
PAINTER,
OR
WHAT
DO
YOU
DO
IF
YOU
CANNOT
PREDICT?*
You
should
charge people
for
advice—My
two
cents
here—Nobody
knows
anything,
but,
at
least,
he
knows
it—Go
to
parties
ADVICE
IS
CHEAP,
VERY
CHEAP
It
is not a good habit to
stuff
one's text with quotations from prominent
thinkers, except to make fun of them or provide a historical reference.
They
"make sense," but well-sounding maxims force themselves on our
gullibility
and do not always stand up to empirical tests. So I chose the ioU
lowing statement by the ùberphilosopher Bertrand Russell precisely be-
cause I disagree with it.
The
demand for certainty is one which is
natural
to man, but is never-
theless an intellectual vice. If you take your children for a picnic on a
doubtful day, they will demand a dogmatic answer as to whether it
will
be fine or wet, and be disappointed in you when you cannot be
sure. .. .
*
This
chapter
provides a general conclusion for those who by now say,
"Taleb,
I get
the
point, but what should I
do?"
My answer is
that
if you got the point, you are
pretty
much
there.
But here is a nudge.
202
WE
JUST
CAN'T
PREDICT
The
reader may be surprised that I disagree. It is hard to disagree that
the demand for certainty is an intellectual
vice.
It is hard to disagree
that we can be led astray by some cocksure prophet. Where I beg to differ
with the great man is that I do not believe in the track record of advice-
giving "philosophy" in helping us deal with the problem; nor do I believe
that virtues can be easily taught; nor do I urge people to strain in order to
avoid making a judgment. Why? Because we have to deal with humans as
humans. We cannot teach people to withhold judgment; judgments are
embedded in the way we view
objects.
I do not see a "tree"; I see a pleas-
ant or an ugly tree. It is not possible without great, paralyzing effort to
strip these small values we attach to matters. Likewise, it is not possible to
hold a situation in one's head without some element of bias. Something in
our dear human nature makes us want to believe; so what?
Philosophers since Aristotle have taught us that we are deep-thinking
animals,
and that we can learn by reasoning. It took a while to discover
that we do effectively think, but that we more readily narrate backward in
order to give ourselves the illusion of understanding, and give a cover to
our past actions. The minute we forgot about this point, the "Enlighten-
ment" came to drill it into our heads for a second time.
I'd rather degrade us humans to a level certainly above other known
animals but not quite on a par with the ideal Olympian man who can ab-
sorb philosophical statements and act accordingly. Indeed, if philosophy
were
that
effective,
the self-help section of the local bookstore would be of
some
use in consoling souls experiencing pain—but it isn't. We forget to
philosophize when under strain.
I'll
end this section on prediction with the following two lessons, one
very
brief
(for the small matters), one rather lengthy (for the large, impor-
tant decisions).
But
so long as men are not trained [emphasis mine] to withhold
judgment in the absence of evidence, they will be led astray by
cock-
sure prophets . . . For the learning of every virtue there is an appropri-
ate discipline, and for the learning of suspended judgment the best
discipline
is philosophy.
APPELLES
THE
PAINTER,
OR
WHAT
DO YOU DO IF YOU
CANNOT
PREDICT?
203
Being
a
Fool
in
the
Right
Places
The
lesson for the small is: be
human!
Accept that being
human
involves
some
amount of epistemic arrogance in
running
your affairs. Do not be
ashamed of that. Do not try to always withhold judgment—opinions are
the
stuff
of
life.
Do not try to avoid predicting—yes, after this diatribe
about prediction I am not urging you to stop being a
fool.
Just be a fool in
the right places.*
What
you should avoid is unnecessary dependence on large-scale
harmful predictions—those and only those. Avoid the big subjects that
may
hurt
your future: be fooled in small matters, not in the large. Do not
listen
to economic forecasters or to predictors in social science (they are
mere entertainers), but do make your own forecast for the picnic. By all
means,
demand certainty for the next picnic; but avoid government social-
security
forecasts for the year
2040.
Know
how to rank beliefs not according to their plausibility but by the
harm they may cause.
Be
Prepared
The
reader might
feel
queasy reading about these general failures to see
the future and wonder what to do. But if you shed the idea of full pre-
dictability,
there are plenty of things to do provided you remain conscious
of
their limits. Knowing that you cannot predict does not mean that you
cannot benefit from unpredictability.
The
bottom line: be prepared! Narrow-minded prediction has an anal-
gesic
or therapeutic
effect.
Be aware of the numbing
effect
of magic
numbers. Be prepared for all relevant eventualities.
THE
IDEA
OF
POSITIVE
ACCIDENT
Recall
the empirics, those members of the Greek school of empirical med-
icine.
They considered that you should be open-minded in your medical
diagnoses to let luck play a role. By luck, a patient might be cured, say, by
*
Dan Gilbert showed in a famous
paper,
"How Mental Systems Believe,"
that
we
are
not
natural
skeptics and
that
not believing required an expenditure of mental
effort.
204
WE
JUST
CAN'T
PREDICT
eating some food that accidentally
turns
out to be the cure for his disease,
so
that the treatment can then be used on subsequent patients. The posi-
tive
accident (like hypertension medicine producing side benefits that led
to Viagra) was the empirics' central method of medical discovery.
This
same point can be generalized to
life:
maximize the serendipity
around you.
Sextus
Empiricus retold the story of Apelles the Painter, who, while
doing a portrait of a horse, was attempting to depict the foam from the
horse's mouth. After trying very
hard
and making a mess, he gave up and,
in irritation, took the sponge he used for cleaning his brush and threw it
at the picture. Where the sponge hit, it left a perfect representation of the
foam.
Trial
and error means trying a lot. In The
Blind
Watchmaker, Richard
Dawkins brilliantly illustrates this notion of the world without grand de-
sign, moving by small incremental random changes. Note a slight dis-
agreement on my
part
that does not change the story by much: the world,
rather, moves by
large
incremental random changes.
Indeed, we have psychological and intellectual difficulties with trial and
error, and with accepting that series of small failures are necessary in
life.
My
colleague Mark Spitznagel understood that we humans have a men-
tal
hang-up
about failures: "You need to love to lose" was his motto. In
fact,
the reason I felt immediately at home in America is precisely because
American culture encourages the process of failure, unlike the cultures of
Europe and Asia where failure is met with stigma and embarrassment.
America's
specialty is to take these small risks for the rest of the world,
which explains this country's disproportionate share in innovations. Once
established, an idea or a product is later "perfected" over there.
Volatility
and
Risk
of
Black
Swan
People are often ashamed of losses, so they engage in strategies that pro-
duce very little volatility but contain the risk of a large loss—like
col-
lecting
nickels in front of steamrollers. In Japanese culture, which is
ill-adapted to randomness and badly equipped to
understand
that bad
performance can come from bad luck, losses can severely tarnish some-
one's reputation. People hate volatility,
thus
engage in strategies exposed
to blowups, leading to occasional suicides after a big loss.
Furthermore, this trade-off between volatility and risk can show up in
APPELLES
THE PAINTER,
OR
WHAT
DO YOU DO IF YOU
CANNOT
PREDICT?
205
careers that give the appearance of being stable, like jobs at IBM until the
1990s.
When laid off, the employee faces a total void: he is no longer fit
for
anything else. The same holds for those in protected industries. On the
other
hand,
consultants can have volatile earnings as their clients' earnings
go up and
down,
but face a lower risk of starvation, since their skills
match demand—fluctuât nec mergitur (fluctuates but doesn't sink).
Like-
wise,
dictatorships that do not appear volatile, like, say, Syria or Saudi
Arabia,
face a larger risk of chaos than, say, Italy, as the latter has been in
a
state of continual political turmoil since the second war. I learned about
this problem from the finance industry, in which we see "conservative"
bankers sitting on a pile of dynamite but fooling themselves because their
operations seem
dull
and lacking in volatility.
Barbell
Strategy
I
am trying here to generalize to real
life
the notion of the "barbell" strat-
egy
I used as a trader, which is as follows. If you know that you are vul-
nerable to prediction errors, and if you accept that most "risk measures"
are flawed, because of the
Black
Swan, then your strategy is to be as hy-
perconservative and hyperaggressive as you can be instead of being mildly
aggressive or conservative. Instead of
putting
your money in "medium
risk" investments (how do you know it is medium risk? by listening to
tenure-seeking "experts"?), you need to put a portion, say 85 to 90 per-
cent,
in extremely safe instruments, like Treasury bills—as safe a class of
instruments as you can manage to find on this planet. The remaining 10 to
15
percent you put in extremely speculative bets, as leveraged as possible
(like
options), preferably venture capital-style portfolios.* That way you
do not depend on errors of risk management; no
Black
Swan can
hurt
you
at all, beyond your "floor," the nest egg that you have in maximally safe
investments. Or, equivalently, you can have a speculative portfolio and in-
sure it (if possible) against losses of more than, say, 15 percent. You are
"clipping" your incomputable risk , the one that is harmful to you. Instead
*
Make sure
that
you have plenty of these small bets; avoid being blinded by the
vividness of one single
Black
Swan. Have as many of these small bets as you can
conceivably
have. Even venture capital firms fall for the
narrative
fallacy with a
few stories
that
"make sense" to them; they do not have as many bets as they
should. If venture capital firms are profitable, it is not because of the stories they
have
in their heads, but because they are exposed to unplanned
rare
events.
206
WE
JUST
CAN'T
PREDICT
of
having medium risk, you have high risk on one side and no risk on the
other. The average will be medium risk but constitutes a positive exposure
to the
Black
Swan. More technically, this can be called a "convex" combi-
nation. Let us see how this can be implemented in all aspects of
life.
"Nobody
Knows
Anything"
The
legendary screenwriter William Goldman was said to have shouted
"Nobody knows anything!" in relation to the prediction of movie sales.
Now, the reader may wonder how someone as successful as Goldman can
figure out what to do without making predictions. The answer stands per-
ceived
business logic on its head. He knew that he could not predict indi-
vidual events, but he was well aware that the unpredictable, namely a
movie
turning
into a blockbuster, would benefit him immensely.
So
the second lesson is more aggressive: you can actually take advan-
tage of the problem of prediction and epistemic arrogance! As a matter
of
fact, I suspect that the most successful businesses are precisely those
that know how to work around inherent unpredictability and even ex-
ploit it.
Recall
my discussion of the biotech company whose managers
under-
stood that the essence of research is in the unknown unknowns. Also,
notice
how they seized on the "corners," those free lottery tickets in the
world.
Here are the (modest) tricks. But note that the more modest they are,
the more effective they will be.
a. First, make a distinction between positive contingencies and nega-
tive
ones. Learn to distinguish between those
human
undertakings
in which the lack of predictability can be (or has been) extremely
beneficial
and those where the failure to
understand
the future
caused harm. There are both positive and negative
Black
Swans.
William
Goldman was involved in the movies, a positive-Black
Swan
business. Uncertainty did occasionally pay off there.
A
negative-Black Swan business is one where the unexpected
can
hit
hard
and
hurt
severely. If you are in the military, in catastro-
phe insurance, or in homeland security, you
face
only downside.
Likewise,
as we saw in Chapter 7, if you are in banking and lend-
ing,
surprise outcomes are likely to be negative for you. You lend,
APPELLES
THE PAINTER,
OR
WHAT
DO YOU DO IF YOU
CANNOT
PREDICT?
207
and in the best of circumstances you get your loan back—but you
may lose all of your money if the borrower defaults. In the event
that the borrower enjoys great financial success, he is not likely to
offer
you an additional dividend.
Aside from the movies, examples of positive-Black Swan busi-
nesses are: some segments of publishing, scientific research, and
venture capital. In these businesses, you lose small to make big.
You
have little to lose per book and, for completely unexpected
reasons, any given book might take off. The downside is small and
easily
controlled. The problem with publishers, of course, is that
they regularly pay up for books,
thus
making their
upside
rather
limited and their downside monstrous. (If you pay $10 million for
a
book, your
Black
Swan is it not being a bestseller.) Likewise,
while technology can carry a great payoff, paying for the
hyped-up
story, as people did with the dot-com bubble, can make any
upside
limited and any downside huge. It is the venture capitalist who in-
vested in a speculative company and sold his stake to unimagina-
tive investors who is the beneficiary of the
Black
Swan, not the
"me,
too" investors.
In
these businesses you are lucky if you
don't
know anything—
particularly if others
don't
know anything either, but aren't aware
of
it. And you fare best if you know where your ignorance
lies,
if
you are the only one looking at the
unread
books, so to speak. This
dovetails into the "barbell" strategy of taking maximum exposure
to the positive
Black
Swans while remaining paranoid about the
negative ones. For your exposure to the positive
Black
Swan, you
do not need to have any precise
understanding
of the structure of
uncertainty. I find it
hard
to explain that when you have a very lim-
ited loss you need to get as aggressive, as speculative, and some-
times as "unreasonable" as you can be.
Middlebrow thinkers sometimes make the analogy of such
strategy with that of collecting "lottery tickets." It is plain wrong.
First,
lottery tickets do not have a scalable payoff; there is a known
upper
limit to what they can deliver. The ludic
fallacy
applies
here—the scalability of real-life payoffs compared to lottery ones
makes the
payoff
unlimited or of
unknown
limit. Secondly, the lot-
tery tickets have known rules and laboratory-style well-presented
possibilities;
here we do not know the rules and can benefit from
208
WE
JUST
CAN'T
PREDICT
this additional uncertainty, since it cannot
hurt
you and can only
benefit
you.*
b.
Don't look for the precise and the
local.
Simply, do not be narrow-
minded. The great discoverer Pasteur, who came up with the no-
tion that chance favors the prepared, understood that you do not
look
for something particular every morning but work
hard
to let
contingency
enter your working
life.
As
Yogi
Berra, another great
thinker, said, "You got to be very careful if you
don't
know where
you're going, because you might not get there."
Likewise,
do not try to predict precise
Black
Swans—it tends to
make you more vulnerable to the ones you did not predict. My
friends Andy Marshall and Andrew Mays at the Department of
Defense
face
the same problem. The impulse on the
part
of the mil-
itary is to devote resources to predicting the next problems. These
thinkers advocate the opposite: invest in preparedness, not in pre-
diction.
Remember
that infinite vigilance is just not possible.
c.
Seize any opportunity, or anything
that
looks like opportunity.
They
are rare, much rarer
than
you think. Remember that positive
Black
Swans have a necessary first step: you need to be exposed to
them. Many people do not realize that they are getting a lucky
break
in
life
when they get it. If a big publisher (or a big art dealer
or
a movie executive or a hotshot banker or a big thinker) suggests
*
There
is a finer epistemological point. Remember
that
in a virtuous
Black
Swan
business, what the past did not reveal is almost
certainly
going to be good for you.
When
you look at past biotech revenues, you do not see the superblockbuster in
them,
and owing to the potential for a
cure
for
cancer
(or headaches, or baldness,
or
bad sense of
humor,
etc.),
there
is a small probability
that
the sales in
that
indus-
try
may
turn
out to be
monstrous,
far
larger
than might be expected. On the other
hand,
consider negative
Black
Swan businesses. The
track
record
you see is likely
to
overestimate the
properties.
Recall the 1982 blowup of
banks:
they
appeared
to
the
naïve observer to be
more
profitable than they seemed.
Insurance
companies
are
of two kinds: the
regular
diversifiable kind
that
belongs to Mediocristan (say,
life
insurance)
and the
more
critical
and explosive
Black
Swan-prone risks
that
are
usually sold to
reinsurers.
According
to the
data,
reinsurers
have lost money on un-
derwriting
over the past couple of
decades,
but, unlike
bankers,
they are introspec-
tive
enough to know
that
it actually could have been far worse, because the past
twenty
years did not have a big
catastrophe,
and all you need is one of those per
century
to kiss the business good-bye. Many finance academics doing "valuation"
on insurance seem to have missed the point.